Retail health set to continue improvement in Q4

Following its October sitting, delayed slightly to include consideration of the Government’s spending review, the KPMG/Synovate Retail Think Tank (RTT) concluded that the state of retail health in the UK continued to recover in the third quarter, thanks to a marginal strengthening of demand and margins.

The RTT’s Retail Health Index (RHI) improved in the third quarter by one point to 87; from a base of 100 in Q1, 2006.

RTT Members believe the shallow upward trend will continue and will reach 88 points in quarter four. The panel expects the period to see both stronger (seasonally-adjusted) demand and a further marginal benefit of margins on health, ahead of the VAT increase in January.

Neil Saunders, Verdict Research, commented: “For every winner there has been a loser in quarter three. Some class-leading retailers are pulling the general health of retail upwards, but there is no doubt that many more, particularly those more dependent on the sale of big ticket items, are pulling strongly in the opposite direction. Retail right now is ‘patchy’; with few consistent trends.

"The state of health continues to edge in a positive direction but it is still far below where it was pre the credit crisis.”

Helen Dickinson, KPMG commented on demand: “The prior year comparatives for quarter four this year are the strongest quarter in 2009, so further predicted growth in retail health this quarter is significant.

"However a lot of growth is now inflationary, with retailers starting to re-price ahead of the VAT rise. October is ending more strongly than it started, with great relief for retailers and consumers alike that the spending review is now out the way."

Tim Denison, Synovate added: “Looking forward to quarter four, retailers are going into Christmas with very tight stock as they did last year. Consequently we don’t expect to see ‘slash & burn’ discounting amongst leading retailers.

"However, it is very close to call, given that demand is delicately balanced with no consistency across regions, sectors or even within individual retailer estates and local, tactical promotional activity might well be more evident to spur demand where it is needed. We spent a great deal of time debating this and in reality it could go either way.

"The important last week of the year which has become vital to the success of December is the sales week. Will margins suffer here? Well, a higher price base in many sectors gives greater capacity to discount without eroding margin; so the consensus is that the majority of retailers will not sacrifice margin."